II The Benelux Economic Union

The Benelux Economic Union Origin and Purpose. The driving force towards an economic unification of Belgium, Luxembourg, and the Netherlands was the desire of their governments-in-exile during World War II to bring about full economic cooperation among the three countries. As early as October 1943, when their territory was still occupied by German armies, the governments-in-exile signed a monetary agreement on the relative values of the Belgian franc and the Dutch florin which indeed paved the way for the Customs Convention of September 1944. This convention reflected the governments' desire to create an economic unit that would be sufficiently large to compete successfully in the postwar world market. It called for the elimination of existing tariff barriers among the signatories and for the levying of common tariff duties on imports from other countries. Inasmuch as economic unity had existed between Belgium and Luxembourg since 1921, the agreement was to create a Customs Union between the Belgian-Luxembourg Economic Union and the Netherlands.1 Although this Customs Convention suppressed the existing duties on goods passing from one member state into another, it did not include provisions abolishing either the differences in excise taxes or the elaborate system of import licenses and quotas as well as exchange control. Nevertheless, it was hoped and expected that this "customs union" would develop into a complete union with a common market in which goods would flow freely among the territories of the member states with no restrictions whatever.

The Organization. The 1944 Customs Convention also provided 1 "Texte de la Convention douaniere belgo-luxembourgeoise-neerlandaise," in Jean Van Der Mensbrugghe, Les Unions Economiques: Realisations et Perspective, Institut des Relations International, Brussels, 1950, pp. 349-351. 152 THE BENELUX ECONOMIC UNION 153 for certain organs which were to implement the provisions of the Agreement and to prepare the way for further agreements on unification. It provided for the following three councils which are composed of an equal number of government representatives from the Netherlands and the Belgo-Luxembourg economic union: 1. A customs council which is to assure uniform legislation as to import duties. After World War II a special commission was created to assist this council in the examination of disagreements and disputes arising from the interpretation of the Customs Convention; 2. A union council which is to coordinate the commercial policies of the three member states; 3. A foreign trade council which is to assure a coordination of commercial relations with third countries.

These were the first steps of the governments of Belgium, Luxembourg, and the Netherlands on the way towards an economic union. Implementation of the Agreement Delayed. The Agreement was to go into effect as soon as the three countries were liberated. However, its implementation was delayed in 1944-1945, at the time of actual liberation, because the attention of governments was fixed on other problems as, for example, the immediate problems of reconstruction, credit and money reforms, economic production and fair distribution, etc. But finally, in April 1946, some ministers from the member states met to examine and discuss the possibility of realizing the 1944 agreement. It immediately became apparent that the tariff list which was drawn up as an annex to the Customs Convention was unsatisfactory to all signatories and that a new tariff list had to be drafted. But this was a very difficult task. Great disparities of duties "on account of different needs for protection" existed between the two areas, and even the methods of calculating the tariff duties were different. In order to iron out numerous conflicts which had arisen among the member states, a permanent institution, the "Meeting of the Prime Ministers," was set up in March 1947. The Prime Ministers were to attempt to coordinate the work of councils and thus hasten the process of unification. It was also decided that another institution was needed whose task would be essentially administrative, and thus a "Secretariat General" was established with its seat in Brussels.2 Customs Convention Ratified. After several meetings of the 2 Department of State Publication 4944, Regional Organizations, April 1953, p. 6; L. de Sainte-Lorette, L'IntSgration Economique de VEurope, Paris, 1953, p. 92 et seq.; J. Van Der Mensbrugghe, Ibid., p. 26 et seq.; William Diebold, Trade and Payments in Western Europe, Harper & Brothers, New York, 1952, p. 319 et seq.

154 STEPS TOWARD UNION Prime Ministers and after considerable work on the part of all councils, the Convention and annexed documents were submitted to the parliaments of the three member states and ratified in July and August 1947. The Customs Union went into effect on January 1, 1948. As it was soon recognized that the economic policies of the member countries must necessarily be coordinated in order to give meaning to a customs union, the governments decided to broaden the aim of Benelux to an "Economic Union." The following objectives were agreed upon by the Prime Ministers attending a conference in June 1948: (1) to return to a system that allows freedom of consumption; (2) to reduce government subsidies to producers and consumers; (3) to coordinate their citizens' investments; (4) to unify fiscal and social policies; (5) to conduct policies that guarantee monetary equilibrium. It was hoped that this Economic Union, in operation, would bring about free movement of persons, goods, and capital within its area.

The Prime Ministers even went so far as to set a tentative date for formation of this union: January 1, 1950. Progress Slower Than Anticipated. Once again the governments of the three member states were in agreement, and harmony reigned during the meeting of the Prime Ministers at The Hague in March 1949. Again plans and projects for future unification were agreed upon. Special attention was given to the necessity for free convertibility of the members' currencies, harmonization of agricultural policies, coordination of wages and social security, and coordination of systems of taxation. But as to the realization of this and previous plans of unification, the Prime Ministers decided to postpone the date six months. They also made arrangements for a "pre-union period" lasting from July 1, 1949 to July 1, 1950, during which the governments pledged to remove the barriers to interstate trade and to unify Benelux trade with other countries.

The Conference at The Hague in 1949 probably constituted the climax of the Benelux Union movement, "an example of unity in a divided world." All conceivable plans and projects were drawn up —only realization had to follow. The first difficulties arose out of "trade deficits" of the Netherlands to Belgium. Financing of these deficits depended on the European Payments Union, then in the process of being revised. Other domestic problems, such as Holland's colonial problems in Indonesia and Belgium's problems connected with the abdication of the Belgian king, began to overshadow the problem of unification. Both governments grew reluctant to accept new obligations, and when THE BENELUX ECONOMIC UNION 155 the date for the "pre-union" arrived, postponement for the time being was agreed upon. Towards the end of 1949 it seemed as if some progress could be made. In September 1949 the Dutch had devalued their currency to a larger degree than the Belgians and new credits were advanced to the Dutch central bank by the Belgians. But during the following spring the "balance-of-payment deficits" began to plague the Dutch government again, and so it was concluded by all parties concerned that realization of a full economic union could not be considered until the imbalance of trade was overcome. Also, the desired removal of certain Belgian levies on agricultural imports from Holland and the coordination of turnover taxes were very difficult. During the first half of 1951 the Dutch "balance-of-payment"

problems became so great that some of the preliminary work towards union was even undone. The governments concerned therefore pledged to take the necessary steps internally to correct the causes that had led to the reimposition of trade restrictions. After that, silence enveloped the Benelux Union, which had been the example of unity in a divided world. Only occasionally does one read of hopes and new plans for Benelux unification. The "Economic Stumbling Blocks' in Contemporary Literature. The fact that the Benelux nations have made so little progress towards the unification desired during the decade since the Customs Convention was signed, is explained and interpreted in many ways by contemporary writers. The difference in internal economic policies is most frequently quoted as the main obstacle in the path of unification. The London Economist, for instance, stated, "For the moment the chief obstacle to the realization of the Benelux idea is the difference in the internal policies of the two countries: rigid State interventionism in Holland and qualified liberalism in Belgium. Holland cannot accept the free circulation of goods within the Union so long as price levels and conditions of supply and demand cannot find their conditions of equilibrium." 3 Another article in the same periodical expressed a similar concern regarding the lack of equilibrium. It reads as follows: "As the Belgians and Dutch are discovering, it is not schemes of union that create economic balance but the attainment of balance that alone makes schemes of union—either of currency or of customs union—feasible. There are no short-cuts."4 3 The Economist, May 31, 1947, p. 853.

4 The Economist, August 20, 1949, p. 389. For criticism see further below: "The Great Fallacy."

156 STEPS TOWARD UNION Shortages of foreign exchange are said to have led the Dutch government to use quotas and foreign exchange control in order to restrict imports from Belgium. In spite of numerous complaints by Belgian producers who were eager to sell in the Dutch market, the government of Holland refused to remove the quotas because it feared the loss of gold and foreign exchange reserves. As long as the Belgian government advanced substantial credits to Holland for imports from Belgium no difficulties arose. But the Belgians felt that they could not go on lending additional funds indefinitely. They insisted that Holland remove her rationing and quota regulations; the Dutch government insisted on continuing government controls as long as there was disequilibrium. When Belgium once again advanced new credits to the Dutch central bank and when the European Payments Union granted it considerable amounts of drawing rights, the government of Holland allowed Dutch imports from Belgium to rise. But when Dutch credits were almost exhausted and deficits were still growing during the first half of 1951, the Dutch government once again curtailed imports from Belgium, and old controls and restrictions were reimposed.5 Another offered explanation of the Benelux failure, an explanation with which we entirely agree, refers to the divergencies of agricultural prices between the two territories. Any divergency of national prices from free-market prices is government-created and desired by the respective producers who are backed by parliament.

Abolition of price divergencies inescapably runs counter to the wellentrenched interests of the protected producers. In the Netherlands agriculture is the mainstay of the national economy, and agricultural products, especially dairy products and vegetables, are the country's main export items. They are better and cheaper than in Belgium or any other neighboring country. Furthermore, the Dutch government paid high subsidies to the Dutch farmers for social, economic, and other reasons. Naturally, Holland expected to sell large quantities of her cheap farm products to Belgian consumers. But here the Belgian government stepped in. How could it allow its higher-cost farmers and producers to be exposed to Dutch competition, especially since the Belgian farmers were protesting against Dutch "flooding" of the Belgian food market with cheap and "unfairly priced" goods? The problem was finally solved by negotiating a protocol that assured minimum prices and "fair profits" to producers. It also emphasized the right of a member government to "protect its home market against third countries and partner 5 William Diebold, Ibid., p. 336 et seq.

THE BENELUX ECONOMIC UNION 157 countries."6 This provision naturally meant that Dutch farm products being imported into Belgium were levied with a tax that raised their price to the Belgian level. Of course, these taxes on imports were not custom levies—at least, their names said they were not. Another issue that contributed to the defeat of the Benelux idea was the existence of different excise taxes on similar products. Excise taxes are revenues for government treasuries. The multiplicity of social and economic functions of modern government requires vast revenues which are either collected through taxation, outright inflation, or both. At any rate, modern governments largely depend on all kinds of taxes and, among others, on excise taxes. As Jacob Viner pointed out, standardization of these taxes was a major problem whose complexity "may, in fact, have been a significant factor in preventing customs union agreements from being reached." 7 He also quoted G. de Molinari who stated that "the most serious difficulty, and we can even say the sole genuinely serious difficulty which the formation of an international Zollverein will face, rests in the standardization of excise regimes." 8 We agree, with the sole reservation that modern tools of government control—foreign exchange control, quotas, government monopolies, etc.—are even more formidable obstacles to unification than excise taxes. The latter in general owe their existence merely to fiscal need for revenue, while control and planning are the basic functions of modern government.

It is obvious that abrogation of a fundamental function of government is more difficult to obtain than a mere renunciation of revenue. Unification of excise taxes can be effected by raising the lower rates of one country to the higher rates of the other. Such a solution is acceptable to both governments since one loses no revenue while the other even gains. Of course, the Dutch and Belgian governments wanted to try this, but their parliaments would not agree. The Belgian parliament, for example, refused to raise the tax on beer because considerable Belgian opposition among producers and consumers was encountered. The Belgian producers even organized a real campaign of opposition under the slogan: "Benelux perhaps— but pay more a pint for our beer, never!" 9 Another popular explanation for the failure of Benelux refers to « William Diebold, Ibid., p. 334. 7 Jacob Viner, The Customs Union Issue, Carnegie Endowment for International Peace, New York, 1950, p. 61.

8 G. de Molinari, "Union douaniere de l'Europe," in Journal des economistes, 4th Series, 2nd year, V (1879), pp. 314-315. 9 John Goormaghtigh, European Integration, International Conciliation, Carnegie Endowment for International Peace, New York, 1953, p. 77.

158 STEPS TOWARD UNION World War II. Eight months passed between the liberation of Belgium and the freeing of the greater part of Holland from German occupation. And this difference in time of liberation with all its effects on reconstruction and development is cited as a difficulty in unification. In addition, the war destruction of capital and wealth was much more severe in Holland than in Belgium. Van Der Mensbrugghe estimated the extent of war damages per head of population to have amounted to $274 in Belgium and $418 in the Netherlands. War destroyed about one-third of Holland's national wealth, while Belgium's losses amounted to less than 4 per cent. These figures are offered to us as explanation for the contradictory political situation in both countries and as reason for the Benelux failure.10 Considerable opposition to Benelux was also offered on the part of Belgian workers and trade unions. Wages are much higher in Belgium than in the Netherlands. Unification of these countries would also mean free migration, thus allowing thousands of Dutch workers to pour into Belgium and compete with Belgian workers in the labor market. Belgian wage rates would naturally drop—and Belgian workers would strike and complain. Importation of cheap Dutch goods was also opposed by labor in Belgium on grounds of "unfairly low labor costs" in Holland. But similar arguments were also advanced by Dutch workers and trade unions. The Dutch heavy industries greatly rebuilt and renovated by American means out of Marshall aid funds, worked with much higher costs than Belgian competitors. Unification would therefore mean unemployment of capital and labor in the heavy industries in Holland. But such a price was far too high; unification yes—but never readjustment and unemployment!

Customs Union and Governmental Intervention. As we have repeatedly pointed out, the removal of interstate barriers between countries with important economic relations is a very difficult matter because of the growth of governmental intervention in economy. It is especially difficult if the two countries have centrally planned economies. Nowadays, tariffs, quotas, exchange controls, import licenses, state import monopolies, rationing and allocating, etc., protect the desired national price and wage structures, the volume of employments, social security programs, artificial foreign exchange rates, monetary and fiscal policies, and so forth. There is no longer a well-functioning international division of labor or an equilibrium of price structures. Whatever balance there is left within a national i° J. Van Der Mensbrugghe, Ibid., p. 40. For criticism see further below, p. 165.

THE BENELUX ECONOMIC UNION 159 economic unit depends on the maintenance of appropriate barriers to imports or subsidies to exports. An economic union, therefore, presupposes an equalization of economic controls, central plans, and objectives. It even presupposes an harmonization of social structures, of powers of pressure groups, and their future intent. It is obvious that such a union is not only difficult to attain, but also involves a more complete degree of political unification than a union under free-market conditions. During the nineteenth century, when the world was an interrelated market economy, prices were flexible and unhampered by government decrees. Exchange control was an unknown phenomenon, exchange rates were relatively stable, and costs were flexible because of absence of government wage regulation, cartelization, or extensive collective bargaining. Under these circumstances lowering or removing tariff barriers could be taken in stride, although it might still cause a temporary shock. Tariffs merely constituted an element in cost and their removal brought about limited repercussions in the structure of cost and production. Otherwise world economy was an unhampered market economy.